In a recent significant move in the automotive aftermarket, TBC Corp. sold off its retail assets to Mavis Discount Tire and subsequently decided to shift its focus to franchising, wholesaling and distribution.
TBC is looking to capitalize on its strengths and streamline operations by partnering with franchisees, a move that is seen as a strategic decision to focus on its core competency, aligning its business strategy with industry trends.
Mavis, on the other hand, continues its impressive growth trajectory via acquisitions.
This latest development suggests a change in TBC's approach.
While the Big O Tires franchise stores proved to be lucrative, the performance of the NTB Tire & Service stores must have raised questions about the company's focus, which highlights the apparent shift in enthusiasm for company-owned stores.
The divestiture highlights the importance TBC has put on leveraging strengths rather than attempting to excel in every aspect of the business.
TBC has been actively exploring franchising opportunities for its NTB stores; over the years, the company has converted several NTB locations into Big O franchise locations, selling mostly to capable franchisees, such as Leeds West Groups, to take over these stores and maintain their growth trajectory.
This strategy has been successful in certain regions, including the Northeast, Midwest and South, where Mavis Tire acquired 112 NTB stores in the greater Atlanta, Boston, Chicago and Philadelphia metro areas
It is easy to assume that there were ongoing discussions between TBC and Mavis since then, likely revolving around further store acquisitions and long-term supply agreements.
The shift toward franchising will allow TBC to optimize its business model while Mavis benefits from the economies of scale from 595 new locations.
Perhaps TBC's management gradually became less inclined toward company-owned stores, finding franchising to be a simpler and more profitable venture. This led TBC to make a crucial decision regarding its future direction.
Prior to its decision to divest, I assume that TBC's management engaged investment banks to assess the value of their assets and assist in providing strategic options moving forward. The goal would be to present reasonable options to TBC's board of directors and vote on the best path forward.
Perhaps company leaders and the board found franchising and distribution to be an easier and more profitable venture, or that they had their hand in too many verticals.
Eventually, TBC reached a crossroads and had to decide: should it remain in the business of company-owned stores or transition fully into franchising and distribution?
Overall, TBC's move reflects a strategic decision to optimize operations and tap into the growth opportunities presented by this business model. By focusing on its strengths and partnering with franchisees, TBC will position itself for long-term success in the automotive services industry.
TBC's strategic shift marks a turning point in its business model, emphasizing its core strengths in distribution and tire manufacturing while leaving operational aspects to franchisees.
For Mavis, the opposite is true; it doubled down on what has made it successful. The success of this venture hinges on Mavis' ability to make the acquired stores profitable. However, with its expertise and growth trajectory, it seems well-prepared to take on the challenge.
Mavis has had significant growth, attracting investments due to its proven ability to scale. Acquiring the company-owned stores from TBC contributes to Mavis Tire's rapid expansion plans and establishes a stronghold as the largest independent retailer in the country.
From Mavis' perspective, this acquisition is a no-brainer. While we may never know the specifics of the transaction, we know the economies of scale will be significant for Mavis.
Purchasing power is a key driver of profitably in the industry; adding several hundred locations only will strengthen Mavis' ability to negotiate pricing and manufacturer programs.
Private-equity firms find the automotive tire and service industry appealing due to its recession-resistant nature, dependable cash flow, scalability and the potential for substantial returns when managed effectively.
The automotive aftermarket will continue to see this type of disruption in the coming years.
If the last few years have taught us anything, it is that business owners need to focus on their strengths and diversify only when and where appropriate.
I have come across too many tire and service dealers who have their hands in multiple business models, and they are unable to maximize profits of each division on its own.
Taking the playbook and understanding the thought processes of these large organizations is a prudent approach for many dealers.
Giorgio Andonian is the managing director at FOCUS Investment Banking.